Which of the following best describes the element of inherent risk that underlies the application of
generally accepted auditing standards, specifically the standards of field work and reporting?
a. Cash audit work may have to be carried out in a more conclusive manner than inventory audit work.
b. Intercompany transactions are usually subject to less detailed scrutiny than arm’s length transactions with outside parties.
c. Inventories may require more attention by the auditor on an engagement for a merchandising enterprise than on an engagement for a public utility.
d. The scope of the audit need not be expanded if misstatements that arouse suspicion of fraud are of relatively insignificant amounts.
The remaining questions deal with tests of controls. Choose the best response. 19. Which of the following statements about tests of controls is most accurate?
a. Auditing procedures cannot concurrently provide both evidence of the effectiveness of internal control procedures and evidence required for substantive tests.
b. Tests of controls include observations of the proper segregation of duties. c. Tests of controls provide direct evidence about monetary misstatements in transactions. d. Tests of controls ordinarily should be performed as of the balance sheet date or during the
period subsequent to that date. 20. Which of the following would be least likely to be included in an auditor’s tests of controls?
a. Documentation. b. Observation. c. Inquiry. d. Confirmation
21. The two phases of the auditor’s involvement with internal control are sometimes called
“understanding and assessment” and “tests of controls.” In the tests of controls phase, the auditor attempts to obtain
a. A reasonable degree of assurance that the client’s internal controls are operating effectively on a consistent basis throughout the year.
b. Sufficient, competent evidential matter to afford a reasonable basis for the auditor’s opinion.
c. Assurances that informative disclosures in the financial statements are reasonably adequate.
d. Knowledge and understanding of the client’s prescribed procedures and methods.
QUIZ #2 – ACCT 422‐ Auditing – SPRING 2017 PAGE 5 22. Which of the following is ordinarily considered a test of control audit procedure?
a. Sending confirmation letters to banks. b. Counting and listing cash on hand. c. Examining signatures on checks. d. Preparing reconciliations of bank accounts as of the balance sheet date.
23. A factory foreman at Stevens Company discharged an hourly worker but did not notify the payroll
department. The foreman then forged the worker’s signature on time cards and work tickets and, when giving out the checks, diverted the payroll checks drawn from the discharged worker to his own use. The most effective procedure for preventing this activity is to
a. Require written authorization for all employees added to or removed from the payroll. b. Have a paymaster who has no other payroll responsibility distribute the payroll checks. c. Have someone other than persons who prepare or distribute the payroll obtain custody of
unclaimed payroll checks. d. From time to time, rotate persons distributing the payroll.
24. The CPA reviews Peter Company’s payroll procedures. An example of an internal control deficiency
is to assign to a department supervisor the responsibility for
a. Distributing payroll checks to subordinate employees. b. Reviewing and approving time reports for subordinates. c. Interviewing applicants for subordinate positions before hiring is done by the personnel
department. d. Initiating requests for salary adjustments for subordinate employees.
25. Effective internal control over the purchasing of raw materials should usually include all of the
following procedures except
a. Systematic reporting of product changes that will affect raw materials. b. Determining the need for the raw materials prior to preparing the purchase order. c. Obtaining third‐party, written quality and quantity reports prior to payment for the raw
materials. d. Obtaining financial approval prior to making a commitment.
QUIZ #2 – ACCT 422‐ Auditing – SPRING 2017 PAGE 6 26. Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail
hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a COD basis, thereby enabling his relative to buy at Lake’s wholesale prices. Budd was probably able to accomplish this because of Lake’s poor internal control over.
a. Purchase requisitions b. Cash receipts. c. Perpetual inventory records. d. Purchase orders.